Fee Shifting as a Risk Management Exercise

I have written before that patent plaintiffs may welcome more fee-shifting so long as they are balanced in the way that they apply both to plaintiffs and defendants. In Octane Fitness, the Supreme Court followed this pathway – giving trial court judges discretionary authority to determine which cases are sufficiently “exceptional” to warrant an attorney fee award.

Because of the expense, unpredictability, and potential delays of patent litigation, patent assertion entities spend a considerable amount of time managing and hedging against downside risks. They do this by finding contingency fee attorneys and partners willing provide substantial up-front monies in order to fund an enforcement campaign. Still, in the wake of Octane Fitness, some assertion entities have at least informed their investors of potential risk. Spherix Inc, for instance, recently filed a quarterly report remarking on the topic:

Recent rulings also create an increased risk that if the Company is unsuccessful in litigation it could be responsible to pay the attorney’s fees and other costs of defendants by lowering the standard for legal fee shifting sought by defendants in patent cases.

Of course, for masters-of-risk-management, the increased risk of owing attorney fees upon losing a case is just another risk to be managed.

Athena Fee Shifting Protection (FSP): A new product being offered by Athena FSP is designed to help in this regard. In return for a percentage share of any eventual award or settlement, Athena FSP will promise to pay any attorney fee award lodged against their partner. For patent assertion entities, this model eliminates the downside risk of losing a fee shifting award by reducing the potential upside by a few points. (Note: the standard policy limit is $3m).

Although Athena FSP’s product looks like insurance, the company wants to ensure that its product is not regulated as insurance. One difficulty with insurance is that state regulators typically enforce a rule against providing insurance for intentional torts — and losing on an exceptional-case finding has many parallels to intentional torts. Because of the upside-only payout, a better analogy may be to think of Athena FSP as an investor who, instead of paying cash for shares, takes a percentage of revenue in return for co-signing the loan.

I asked Athena’s Director Ashley Keller whether there is some fear that judges will be more likely to award fees in their cases since the partnership with Athena FSP seems designed as a plan toward malfeasance. The well-considered retort is twofold: Athena’s approach is to conduct an extensive deep dive into the potential lawsuit as a way to vet the case and only partner in situations where an exceptional case award is quite unlikely. That vetting process can then serve as evidence that an outside entity was willing to put significant money at risk based upon its thorough analysis that the case was not exceptional. In other words, if this was an insurable risk then it shouldn’t be seen as exceptional.

Just curious, but what is the “standard” set for this type of activity?

“Human spirit will seek to capitalize on every single thing a human can do”

The innate power to contract is impressive in the ways in which people will create vehicles of business, to create “applications of better solutions that meet new requirements, in-articulated needs, or existing market needs.”

Since roughly 97% of patent suits are settled before a final decision on which an attorney fees sanction could be based [absent legislative changes and a few cases of gross pre-trial litigation misconduct] how much of a real risk is this? Will the “High-Octane” Sup. Ct. pair of cases really have more than a 1% or 2 % deterrent of objectively unreasonable patent litigation by anyone, even NPE’s? Cannot even that small risk be significantly reduced by getting an objective independent 2d opinion of infringement/non-infringement and validity/invalidity before or shortly after the suit is filed? {I.e., an opinion from someone other than an attorney who will profit from the litigation.]

An even better point paul (but one building on what you suggest) is that far less than 2% of active patents even see a court.

The focus here on boogeymen is brought to you by those wanting to scare everyone that there is a massive problem with the basic notion that bringing a suit is the legislated way to enforce patent rights. The word itself of “lawsuit” must be made to immediately conjure up images of demons and wrongfulness.

Great deal. No insurance, so no insurance regulation, hence no real guarantee of pay out. Sign up the trolls and enjoy the feeding fest until the first exceptional fee award. Then declare bankrupcty and close shop. Reopen again with a new name.

Athena’s approach is to conduct an extensive deep dive into the potential lawsuit as a way to vet the case and only partner in situations where an exceptional case award is quite unlikely.

Good for Athena.

That vetting process can then serve as evidence that an outside entity was willing to put significant money at risk based upon its thorough analysis that the case was not exceptional. In other words, if this was an insurable risk then it shouldn’t be seen as exceptional.

Is it just me or is there some circularity/bootstrapping going on here?

Either the case is “exceptional” or it isn’t. The mere fact that some insurance company decided the patent case was worth the gamble doesn’t seem relevant to the issue of whether the case is/was in fact “exceptional”.